With private consumption as the main driver of recovery since China reopened to the world, the country’s real GDP growth in the first quarter of 2023 exceeded expectations. China’s GDP grew 4.5% year-on-year, up from 2.9% in the preceding quarter and higher than market expectations.
The sectoral breakdown suggests that higher growth was mainly driven by the services sector, while activity in agriculture, manufacturing and construction moderated in the opening quarter of the year. Other monthly indicators also suggest a stronger-than-expected trade balance (i.e. resilient exports but still weak imports). There now seems even clearer room for an upside revision to our 2023 real GDP growth forecast of +5%.
Although such forecast is in tune with the Government’s guidance, the main driver of the recovery, private consumption, is expected to outpace and grow by +8.2% this year. Revenge spending can be expected in the early stages of reopening; however, the strength of the consumer rebound could be mitigated by factors such as the labour market, which has yet to be normalized; depleting excess savings; and no strong reversal trend in sight for the real estate sector.
The recovery story remains focused on consumption, though it is likely to be mostly domestic – firms operating in China benefiting more than those exporting to China – and the largest impulse from pent-up demand is likely to be felt in the first half of the year. Structural issues such as the real estate sector and youth unemployment will take consumer spending longer than it did in 2021 to return to pre-pandemic levels.
Authorities are looking to tackle these structural issues, albeit this could come at the expense of policy support. On the fiscal front, the target for new issuance of local government special bonds was set at RMB3.8 trillion this year, a level lower than expected. This suggests a likely moderate pace of infrastructure investment as the government aims to reduce fiscal deficit. On the monetary policy front, an easing bias is likely to be retained this year, with support specifically provided to some industries and firms such as SMEs. PBOC’s rate cut in Reserve Requirement Ratio in mid-March probably highlighted authorities’ willingness to support market sentiment in view of a conservative growth target for 2023 and concerns stemming from the banking sector abroad.
China’s prolonged lockdowns during the pandemic affected supply chains and input prices greatly. Combined with slower growth and demand, expiring state support schemes and the war in Ukraine, all these will play a part in driving business insolvencies up worldwide. After two years of decline during the pandemic years (-14% in 2020 and -11% 2021), Allianz Trade’s Global Insolvency Index estimates global insolvencies to jump by +21% and +4% this year and next. In China alone, despite successfully keeping insolvencies at bay in 2022 (-13%), the number is expected to go up by +4% this year and +5% further in 2024, largely due to the risks that remain in the real estate and construction sectors.
Our research published in March this year revealed that global working capital requirements (WCR) for listed companies increased by +9 days to 72 days of turnover in 2022. This is the largest annual increase since 2008, following an increase of +3 days in 2021. The rise in WCR is explained by lower growth, higher inflation, the higher cost of financing and more non-payments. In Asia Pacific, WCR rose by +10 days to 77 days of turnover, where all countries but Singapore faced increases, ranging from +2 days in Japan to +12 days in India and +15 days in China. Overall, 22% of Asia Pacific companies are paid after 90 days.
In view of the complex global operating environment, it is essential to employ credit risk management tools to protect your credit risk from trading with current and newly developed partners. Trade credit insurance is one of the more popular credit risk mitigating tools that protects businesses from non-payment of commercial debt.
Simply put, if you do not receive what you are owed due to a buyer’s bankruptcy, insolvency or other issues, or if the payment is very late, the insurance policy will reimburse you for a majority of the outstanding debt. This helps you protect your capital, maintain your cash flow and secure your earnings while extending your competitive credit terms and helping you access more attractive financing.
The biggest advantage of trade credit insurance is that companies are empowered to trade on open terms with guaranteed protection from non-payment or unpaid invoices. Leveraging on Allianz Trade’s database that monitors over 80 million companies amassed over 120 years in the business, we have a deep understanding of how firms across the world behave in terms of payment behaviour. This is particularly valuable for exporters planning on penetrating new markets and customers in the post-pandemic world.
With trade credit insurance, you can reliably manage the commercial and political risks of trade that are beyond your control. It can help you feel secured in extending more credit to current customers or pursuing new, larger customers that would have otherwise seemed too risky. Our role of a trade credit insurer is not just to indemnify losses from a business default, but to provide businesses with knowledge and support, and to steer away from foreseeable losses in the first place.
Paul Flanagan, Regional CEO at Allianz Trade in Asia Pacific